JPM Tries To Explain Why The Bailout Train In Spain Will Lead To Much More Pain

Reports citing European sources state that Eurozone finance ministry officials, followed by finance ministers themselves, will hold conference calls on Saturday. A formal request for Spanish EFSF/ESM/IMF support, solely for the purposes of bank recapitalization, could be announced after these calls, and appears to be the motivation for them. As JPMorgan notes, while the timing of such a request would come as something of a surprise, the substance does not.

JPMorgan goes on to note that:

Yesterday, Spanish PM Rajoy said that the authorities were awaiting reports from independent audits of the banks before assessing the overall recapitalization need, and then deciding how to proceed. One obvious possibility is that the region will agree to a Spanish request in principle, leaving the exact amount to be specified at a later date. To provide some guide posts, our banking analysts have suggested recapitalization needs may ultimately run to €150bn if Irish experience is a template for the losses that may ultimately accrue on the mortgage book. However, reports suggest that the IMF's assessment of recap needs is much lower at near €40bn.

Given that there have been no reports of Germany dropping its resistance to the EFSF/ESM investing directly in the banks, it appears very likely that support will be channelled through the sovereign. The conditionality alongside that support looks set to be relatively light – focused on the banks themselves, rather than requiring more monitoring of broader aspects of policy. But given that the Rajoy administration has already internalised objectives of fiscal consolidation and structural reform - and is seeking to bring its deficit to GDP ratio down by nearly 6 percentage points over two years - this sort of package should not come as a surprise.

A key question is whether this request for external support will serve to improve conditions in the Spanish bond market and raise Spain's chances of avoiding a broader support package. Our best guess is that it will not.

The request for support has at least three negative consequences:

It implies some degree of subordination of other holders of Spanish sovereign debt.

It provides a clear demonstration of the limits of the ability of the sovereign to raise funds on its behalf.

And it crystallizes banking losses accruing to the State which it had hoped to avoid.

We suggest that a banking support package would be likely to turn out to be a stepping stone to a broader package of support for Spain, with that likely to be in place by the end of August. That remains our central view.

JPMorgan's direct exposure to Spain as of the latest 10-Q, as measured under JPM's internal risk management approach is $5.6 billion net in non-sovereign lending. However, they have $42.72 billion in notional CDS protection sold and purchased in Spain, 98% of which is offset, leaving an approximate CDS exposure of another $1.00 billion. This leaves JPM's total Spanish direct exposure at about $6.6 billion.

Seeing as these trading desks are run out of the London office, it would be fair to assume that these assets have been re-hypothicated to infinity and therefore JPM's indirect exposure, in the event of further deterioration in Spain, would be catastrophic.

I'd expect the logic to turn more volatile leading up to Greek elections. With the poll moratorium in Greece, the ever prescient market is rallying on nothing and has put Greece on the backburner. The market is exercising wilful blindness about the upcoming elections right now.

No volume and the PPT doing everything they can to have a positive Friday. In all actuality this Friday should have been bloody as hell because of all the news. And going into a weekend with Spain about to fall.

People who trade and have to know every piece of marginal, market-moving information, as well as which way momentum and focus is shifting - yes

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The 'PEOPLE' you refer to are fucking idiots (assuming they're sitting around waiting for the latest vowels & syllables to spew forth from the JPM cum filled mouths)...

Are you a 'TRADER'?... Yes ~ Then you're a fucking idiot (until this whole paper ponzi collapses)... So ~ if you're a MINUTE 2 MINUTE MARKET MOVING JUNKIE ~ based on the cum filled gargling of these insiders to determine your NEXT MOVE???...

Someone explain why the Spanish government cannot look at which banks are healthiest, which banks are actually gaining deposits as Euros flee banks like Bankia, and then make an executive decision to close many of the banks and move the deposits to the stronger banks. Write down the assets and allow the acquiring bank to take the assets at 20-30 cents on the dollar and clear the decks. The new assets will balance out the hit the resulting banks will take on their existing bad loans.

The market, the market, etc. etc. Banks are not market instruments, they are tools of the Sovereign and implement signiorage. Cut the crap and get it done. Otherwise Europe is going to have to get ready for their next 6.

Actually, Ireland did have a large housing bubble. Half the borrowers there are underwater. I know this market pretty well, and there is basically no bid for a huge swath of Irish property inventory. I've seen 50-75% haircuts on properties sold.

Spain on the other hand had a housing bubble and a commercial real estate bubble.

Well gee, it's great to see that 'the Rajoy administration has already internalised objectives of fiscal consolidation and structural reform - and is seeking to bring its deficit to GDP ratio down by nearly 6 percentage points over two years'. It's exactly these kinds of bold proclamations and 'commitments' that are the key to fixing the sovereign debt crisis in Europe. As I've said before, I'm pretty sure that if enough politicians make enough stern speeches, promising to 'take bold action', 30+ years of debt-driven excess can be resolved painlessly, and in no time at all.

"A key question is whether this request for external support will serve to improve conditions in the Spanish bond market and raise Spain's chances of avoiding a broader support package. Our best guess is that it will not."

Is this is as good of a guess as their hedge book guesses? ..Spain is in a much better shape in comparison to the Portugal/Ireland/ and Greece, I don't see Spain needing a bail out, they have taken the bitter pill of real reforms, they will have a rough path for another year or so, but they will come out much faster and much stronger than the likes of France which is going backwards in terms of reforms. As a matter of fact Spain added jobs the last couple of months, their unemployment could have possibly peaked already.

It is also probable that the June 28th/29th will look for a comprehensive (temporary solution) that will likely paper over things in Europe for another year or two; a move toward a redemption fund would the best “temporary” solution, the market will go wild if they agree on that.